Home

Sunday, January 1, 2017

The Sketchy Beer Year Ahead

We can all agree that 2016 was a tough year. That was particularly true in the entertainment world, where we lost a number of high profile folks. You know who they are. It's also been a tough year for craft beer. I've talked about that in several posts and it's been talked about by others.

Recent reports suggest the slowdown we saw for most of the year continued into the holiday season. Volume growth continued its downward spiral. There was very little good news in the beverage industry as a whole, and beer is obviously part of that.

Everyone in the know wonders if the trends will continue into 2017. That would be fairly bad news for a lot of brewers, but especially for those who hope to score big via distribution. I continue to believe brewpubs and smaller breweries that serve local clienteles will mostly be fine. Retail distribution is another matter.

Softening Market
Now that Anheuser-Busch's merger with SABMiller is complete, many believe brewery acquisitions will slow. Or stop. Heightened DOJ scrutiny is part of that logic. There are also those who think AB and MillerCoors have carved out geographic territory and will now go about the business of building those brands out.

My view is that there will almost certainly be additional acquisitions. DOJ isn't going to be much of a drag on deals. They already waved through a buyout that happened as Mega Brew was being finalized. In the loosened regulatory schematic of the Trump era, it seems unlikely that DOJ is going to be active in blocking mergers and buyouts.

Another factor is overall market weakness. As recently noted here, craft dollar growth dropped dramatically in 2016. It is now barely ahead of volume growth. That means much of the volume growth we are seeing is the result of discounting. The growing popularity of cheaper imports is more evidence that craft beer is hitting a wall on price.

What does that mean? In an overcrowded, increasingly competitive marketplace, breweries that counted on double digit growth and easy profits are vulnerable. They will struggle to make it in a soft, discount-driven market, and be more likely to sell to big beer or private equity. Not all who want to sell will be good targets, so I suspect we'll see closures increase in 2017.

Brewery closures, if they happen, will have an impact similar to the housing market crash a few years back. All of a sudden, we may see breweries (and brewing equipment) available for pennies on dollar of initial investment. That's not good news for the equipment market. We certainly don't want that to happen, but it may be the logical result of an overheated, bloated market.

There is relative safety, if not independence, in selling out. That was surely part of what motivated the folks who sold out to big beer in recent years. If you want to insulate yourself in an overcrowded market, partnering with the deep pockets of big beer isn't a bad idea. Those who sold may have been among the first to see the prospect of oversupply, overpricing and a softening market.

Other Concerns
Despite the probability of more buyouts and consolidation, there are other serious concerns out there. On the distribution side, Anheuser-Busch has been buying up distributors much faster than craft brands in recent years. The ongoing plan is to leverage the power of distribution in every way possible.

That means cutthroat pricing of AB-owned High End brands via AB branch distributors. That type of vertical integration is actually illegal in some states. Where it is legal, like Oregon, the idea is to undercut independent craft brewers and gain access to tap handles and shelf space. It's not a bad strategy in a market where rising prices are a concern. Worry.

There's also the brewpub angle. Reports say AB intends to greatly expand its brewpub portfolio in 2017. We've already seen this with 10 Barrel, which now operates pubs in several cities. Word is, AB plans to take Goose Island national and international. The big idea is to compete with independents and build credibility in key markets everywhere.

What of the IPA craze? Craft's most popular style shows really no signs of slowing down. The downside of that fixation is it has overflowed into other styles, which have gotten hoppier. That's the result of brewers chasing consumer tastes. It's gotten tough to find beers that aren't hoppy.

Now comes news that non-craft IPAs (Goose Island, among others) saw stupendous sales growth last year. Some of that is undoubtedly the result of distribution reach and leveraged pricing. That tactic on the part of big beer will surely escalate. To maintain their edge, independent brewers are finding new ways to differentiate their beers, leading to wilder interpretations of the style.

Specialty beers are a final area of interest. High-priced, specialty beers have attracted a huge following in recent years among geeks, a crowd that has shown a willingness to pay exorbitant prices for a rare experience. Brewers pander to that crowd because it's easy money. Will it continue? Undoubtedly. These beers seem pretty immune to price pressures for now.